Apache Corp. and its partners are “in the throes of negotiations…for a tenant to underpin” the KM LNG project, which would transport liquefied natural gas (LNG) from a terminal near Kitimat, BC, to Asia Pacific markets, CEO G. Steven Farris said last week.

Farris disclosed the discussions during a conference call to discuss the company’s latest quarterly earnings and operations.

KM LNG is majority owned by Apache Canada Ltd. (40%), which is partnering with Encana Corp. and EOG Resources Canada Ltd., each 30% stakeholders. KM secured a 20-year export terminal license from Canadian regulators last October and a final investment decision is expected this year (see NGI, April 30; Oct. 17, 2011).

“We are pretty much done” with the front-end engineering and design (FEED) for the BC project, one of at least half a dozen prospective North American Pacific coast projects. “I can’t tell you enough that the real bottom line for Kitimat or any of these projects [that] what’s happening in the U.S. is an anomaly. [KM] is not a greenfield development.”

As designed, KM would export LNG in two trains with up to 1.4 Bcf/d at full capacity. The project has been on the drawing board in different partnership configurations for about three years; Apache bought a controlling stake two years ago (see NGI, March 21, 2011; Jan. 18, 2010).

Any BC LNG export projects that move forward “are going to have to be oil-based contracts,” said Farris. “And we truthfully are in the throes of negotiations for…a tenant that could underpin that development. But we’re not there until we’re there. So we’re continuing to negotiate.”

A decision will be made “when we have all of the ‘I’s dotted and ‘T’s crossed, and the most important ‘I’ dotted and the ‘T’ crossed is to have an MOU [memorandum of understanding] that is good enough in order to — on the sales side — to take this project forward on an economic basis. And if that comes in the middle of the year, it will be middle of the year. If it comes in the third quarter, it will be in the third quarter.”

The partners “also are continuing to declare right-of-way for the pipeline,” said Farris of KM’s Pacific Trails Pipelines LP (PTP). BC environmental regulators last month approved a request by PTP to expand the Kitimat to Summit Lake Looping Project, which Apache and its partners had requested to allow gas to be transported to the Pacific coast from BC’s Horn River Basin (see NGI, April 23).

“Of course, like anything, cost and price, are synonymous,” said the Apache CEO. “But we haven’t seen great increases on the cost side as we move through FEED.”

Calgary-based Imperial Oil Ltd., which is 75% owned by ExxonMobil Corp., apparently is ready to jump into the LNG exporting business from the Western Canada province as well.

Imperial CEO Bruce March said Wednesday LNG exports might provide the best returns for the producer’s Canadian gas reserves. However, LNG export developments are in the “very early days,” he said during the annual meeting.

ExxonMobil is the biggest leaseholder in the Horn River Basin and the No. 1 gas producer in North America. Last month investor relations chief David Rosenthal said ExxonMobil was investigating many ways to boost demand for natural gas — including LNG exports (see NGI, April 30).

Meanwhile, dry natural gas drilling in North America’s onshore, once a big calling for the Houston-based operator, is off the to-do list until pricing improves, but with 60 rigs running in the U.S. onshore today — 58 targeting liquids targets — “we’ve got a very active drilling program going on right now, the most active we’ve been in some time in North America,” said Farris.

COO Rod Eichler said Apache continues to ramp up in one of its long-time core assets, the Permian Basin, where it is the second largest operator. Production in the first three months of this year averaged almost 99,200 boe/d, with 70% weighted to liquids and 82% black oil, he said. A lot of the drilling success continues to come from conventional drilling, although more of the targets are moving to unconventionals.

“We averaged 28 operated drill rigs for the period, up three from the fourth quarter, drilling 147 vertical wells and 17 horizontals,” said Eichler. “We currently operate 31 rigs in the region, including six horizontals.”

A 14-unit drilling program is up and running in the Permian’s Deadwood area with positive results, he said. In February the first phase of the Deadwood gas processing facility in Glasscock County, TX, started up, an $85 million joint venture project that was launched last July by Apache and Crosstex Energy LP.

“We immediately re-committed the facilities for the 90 MMcf of gas capacity,” said Eichler. “Phase two is expected come online this quarter and will be fully operational later this year. The plant capacity will be 50 MMcf/d.”

Apache also has “more than doubled” its position to nearly 550,000 net acres in the Anadarko Basin fairway of Texas and Oklahoma, after completing its acquisition of privately held Cordillera Energy Partners III LLC at the end of April (see NGI, Jan. 30).

As it moves to more unconventional drilling, Apache completed several notable horizontal wells in the first three months on legacy acreage in the Anadarko Basin. Three horizontal wells drilled in the Cleveland formation averaged initial production (IP) rates over 30 days of 400 b/d of oil and 850 Mcf/d of gas, said Eichler. Two Marmaton horizontals IP’d over 30 days at 340 b/d and 7.5 MMcf/d, while three Granite Wash horizontals averaged 475 b/d and 5.6 MMcf/d.

The transition to oil and liquids drilling is “fully underway” in Canada, the COO told energy analysts. “Sequentially quarterly oil production is up 5%, and gas liquids volumes increased 22%. We averaged seven rigs during the quarter, drilling 58 wells with approximately 60% of these targeting oil reservoirs and one-third targeting rich gas. The remainder were service wells.”

Among Canadian well highlights was the reactivation of the Kaybob well, which IP’d at 1,800 boe/d over 30 days and currently is producing 1,200 boe/d and 2.6 MMcf/d, said Eichler.

“This is the fifth-highest liquid-producing well in Western Canada and is Apache’s highest liquid producer in the region,” he said.

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